Congress fiddles while Treasury burns

Original Reporting | By T.J. Lewan |

Two new tests

The bill also creates two other tests that, until now, have never been part of U.S. law. The first empowers the IRS to treat inverted companies as American for tax purposes if they continue to conduct “significant” business activity within the United States. (“Significant,” according to the bill, means that a company has 25 percent of its workforce, employee compensation, and income and assets “located,” “incurred,” or “derived” in the United States.) The second stipulates that the headquarters of the newly merged entity — together with “substantially all of the executive officers and senior management” — may not remain “primarily” within U.S. territory.

“This legislation would put the lid on inversions.” — Carol P. Tello

What does “substantially all” and “primarily” mean?  Here the legislation gets a little hazy, leaving it to the U.S. Treasury to define those qualifiers more precisely. Still, might U.S. corporations, and the armies of accountants and tax lawyers they hire, find wiggle room in this wording?

Reuven S. Avi-Yonah, a professor at the University of Michigan law school and a lawyer who specializes in international corporate taxation, said such vague terms — carryovers from the 2004 law — “could be a problem” down the road.

While welcoming the headquarters test, which, in his view is “the most meaningful provision in there,” Avi-Yonah told Remapping Debate that he would have preferred to see a “red line” in the legislation on what constitutes a headquarters. “There has to be a better definition — the CEO and three quarters of the executive officers, for example — than the word ‘substantial.’”

Nevertheless, most everyone we interviewed agreed the legislation was fairly airtight and would likely reduce the number of tax-motivated inversions to a trickle — if not dry them up altogether. 

Linda Swartz, chair of the tax group at Cadwalader, Wickersham & Taft LLP, a New York City law firm that helps clients do global mergers and acquisitions: “Fewer companies will do inversions, most likely, if this law is enacted.”

Carol P. Tello, a partner at Sutherland Asbill & Brennan LLP, a firm that counsels multinationals on cross-border tax planning with offices in the United States, United Kingdom, and Switzerland: “This legislation would put the lid on inversions.”

Where’s Congress on Inversions?

If Congress took on inversions once before without a total overhaul of the tax code, why would it be a stretch for lawmakers to do so now?

First, unlike a decade ago, there appears to be zero Republican appetite for targeted anti-inversion legislation — not even from Sen. Charles Grassley (R-Iowa), who, as a ranking member of the Senate Finance Committee in 2002, declared that inversions “aren’t illegal, but they’re sure immoral.”

Now, however, Jill Gerber, Grassley’s press secretary, confirmed to Remapping Debate that Grassley was unprepared to deal with the inversion problem outside of broader changes to the tax system.

In a Senate floor speech in May, Sen. Orrin Hatch (R-Utah), the ranking minority member on the Senate Finance Committee, said “arbitrary inversion restrictions” imposed on companies would only complicate “the goal of comprehensive tax reform.” (Several phone messages left by Remapping Debate requesting an interview or clarification from the senator at his office in Washington, D.C. went unanswered.)

And though Democrats publicly grouse about tax loopholes for big corporations, many appear content to stand on the sidelines while inversions go on. In the Senate, where they have a majority, fewer than half of all Democrats are co-sponsors of Levin’s bill. Even less support is visible in the House; there, just 11 of 199 Democrats have attached their names to the legislation.

Of the 16 Democrats who form a minority on the tax-writing Ways and Means Committee in the House, just seven originally co-sponsored Rep. Sander M. Levin’s legislation. Remapping Debate telephoned and emailed the staff of the nine representatives who hadn’t, to ask why not. We also emailed the staffs of four senior Republican members of the committee, to ask what benefit there was to closing the inversion loophole later, rather than now. The only substantive response was from the chief of staff to Rep. Allyson Schwartz (D-Pa.), who advised us that Schwartz had added her name to the legislation.

Even Sen. Ron Wyden (D-Ore.), the chairman of the Senate Finance Committee, has backed away from what many saw as initial support for the bill. Two weeks before the anti-inversion legislation was introduced on May 20, Wyden wrote an op-ed in The Wall Street Journal, saying he would consider a short-term fix to the problem. But in June he told reporters he preferred to deal with inversions as part of comprehensive tax reform.

Lindsey Held, a spokeswoman for Wyden in Washington, D.C., reaffirmed that position in an interview with Remapping Debate last week: “We think it’s a much better approach to do it in one large, comprehensive effort, rather than just piecemeal.”

Why? “Because it’s not easy,” she said. “Doing tax reform is an extremely heavy lift.” But what is there to gain by waiting to do everything later, as opposed to at least closing the inversion loophole today? “My boss,” she replied, “has been down this road before and done a good job in coming up with a bipartisan approach, which we also think is critical.”

Still, wouldn’t it make sense to stop the erosion of the corporate tax base with at least a temporary fix while negotiating a solution to the larger problem? Held wouldn’t respond directly, saying only that “there is a way to do this in a retroactive manner.”

But if a “bipartisan approach” is what is sought by Wyden, the prospects for retroactivity seem dim. The Levin bill, as it happens, provides that any inversions completed after May 8, 2014 would be annulled. Republicans have fiercely criticized that provision, with Hatch, for one, attacking it in his Senate floor speech. “Retroactive changes to the law…are the antithesis of stability and predictability,” he declared.

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